International Financial Reporting Standards (IFRS) 6 was released as an interim standard, essentially, it serves to combat the accounting complexities for the exploration and assessment of natural resource assets. Notably, IFRS 6 has been in effect since December 2004 and it is effective for accounting periods commencing on or after January 1, 2006. The establishment of IFRS financial statements is an essential requirement for all listed firms in Dubai. Audit firms in Dubai are compelled to adhere to International Financial Reporting Standards 6. Thus, it is vital for external and internal auditors to have in-depth knowledge of IFRS 6 to ensure authentic and high-quality audits.

The Scope of International Financial Reporting Standards 6

IFRS 6 enables companies to create an ideal strategy for exploration and asset appraisal. Subsequent to adopting IFRS 6, the present accounting principles became effective.
It requires organizations that recognize exploration and evaluation assets to conduct an impairment test on such assets when circumstances and facts indicate that the carrying value of the assets may be greater than their replacement cost.
As a result of IFRS 6 Exploration for and Evaluation of Mineral Resources, businesses implementing the standard for the very first time are able to continue using the research and evaluation assets audit procedures previously used.

What Does IFRS 6 Aim to Achieve?

The purpose of IFRS 6 is to outline the financial reporting requirements for the investigation and assessment of mineral resources. As an interim measure, IFRS 6 provides guidance till the International Accounting Standards Board (IASB) completes its comprehensive examination. This is the first phase of a project to take resource extraction activities into account.

Defining IFRS Terms Used

The search for mineral resources, such as minerals, oil, natural gas, and similar non-regenerative resources, after the organization has obtained legal rights to explore in a particular area, along with the commitment of the technical feasibility and commercial value of extracting the mineral resource, are referred to as “exploration for and evaluation of mineral resources” under IFRS 6. Appendix A
Exploration and evaluation expenditures are amounts spent on exploring and evaluating mineral resources before it is clear whether doing so will be technically feasible and economically viable. [IFRS 6. Appendix A]

The Scope of IFRS-Defined Terms

The hunt for mineral resources and assessments of their commercial potential and technological viability are among the tasks that are impacted.

The following are expressly excluded from IFRS 6’s application:

Expenses incurred after it has been established that it is technically and economically feasible to extract a mineral resource
Additional expenses before the business have been granted the right to explore in a particular area.

Key Provisions of IFRS 6

There are three key provisions under IFRS 6: the first is initial recognition, the second is measurement, and the third is impairment.

With initial recognition, you need to assess whether an exploration and evaluation asset meets the definition of an intangible asset. And if it does, you need to determine its fair value.
Measuring oil and gas production activities can be complex, however, IFRS 6 provides expert guidance on this.
With impairment, you need to assess whether the carrying amount of an intangible asset is recoverable.

Alterations to Accounting Principles

The criterion in International Accounting Standards 8 may be used to determine whether an entity may modify its accounting principles for exploring and assessing expenses if the adjustment results in financial statements that are both more pertinent to users’ needs for financial decisions and equally accurate.
According to IFRS 6, an organization must prove that changing its accounting rules for exploration and evaluation costs will enable its financial statements to better fulfill the requirements in IAS 8 in order to justify the change. The adjustment does not have to fully meet those requirements.

Impairment:

The applicability of International Accounting Standards 36, Impairment of Assets to the exploration and evaluation of assets identified by an organization in accordance with its accounting standard is effectively modified by IFRS 6. Particularly:

Whenever specified facts and circumstances specified in the standard suggest that an impairment test is necessary, entities that recognize exploration and evaluation assets are mandated to conduct an impairment test on those assets.
For the purpose of allocation of exploration and evaluation of resources to capital units or groups of CGUs, entities are allowed to choose an accounting method.
Any impairment loss is to be assessed, reported, and disclosed in compliance with IAS 36 if an impairment test is necessary.

Display and Disclosure

The declarations required by IAS 16 Property, Plant, and Equipment or IAS 38 Intangible Assets must be made by the organization in accordance with the way the assets are labeled.

Read More : Methods of Detection of Errors and Frauds in Auditing

IFRS 6 mandates that companies must disclose information that could identify and justifies the sums presented in their accounting records as a result of the search for and assessment of mineral resources, such as:

The basic accounting principles for expenditure on exploration and evaluation, such as the identification of assets used for these purposes
The volumes of assets and liabilities, income and expenses, and operational and investment operating income.

How Is IFRS 6 Different from Other Accounting Standards?

IFRS is more specific, it’s designed to cover the accounting for mineral resources and exploration activities.
IFRS 6 is more focused on cash flow. This is because cash flow is so important when it comes to mineral resources and exploration activities.
IFRS 6 is more flexible than other accounting standards, Companies can use their own judgment when it comes to applying the standard.

Conclusion

IFRS 6 is an essential component for organizations that need to outset IFRS audits. The standard lays out the requirements for an organization to account for leases. For businesses to be geared up for the internal audit process, it is imperative for companies to be savvy about the provisions and applicability of IFRS 6. Top Audit firms in Dubai, provide expert guidance on the applicability of IFRS 6 provisions, in full compliance with the set laws and standards. Contact us today and we shall be happy to assist you.